Not giving insurers enough warning of a potential claim can be a sticking point for law firms. Be aware of the notice periods relating to your insurance policy, advises Sascha Foulkes
Two cases in the past 12 months have highlighted the importance of complying with notice provisions in professional indemnity policies, underlining what is expected of an insured in order to enjoy the full benefit of cover.
Professional indemnity policies in the London Market are written on a ‘claims made’ rather than a ‘losses occurring’ basis. This practice developed in the mid-1980s in response to problems faced by the insurance industry in having to deal with liabilities many years (or even decades) after the expiry of the relevant policy. Adopting a ‘claims made’ approach gave insurers greater certainty about what claims were actually made during the policy period and enables them to evaluate claims promptly, making the necessary provisions or reserves for their ultimate liabilities. Thus they avoid the long-term uncertainty of future claims arising out of occurrences which were, in many cases, unreported at the time they took place.
However, the standard policy wording is not simply limited to providing cover for a claim made during the policy. It is usual for professional indemnity policies, in effect, to extend cover to the insured beyond the actual policy period.
The elasticity of the policy is effected by the inclusion of wording that enables the insured to, for example, “give notice as soon as practicable of any circumstances of which they shall become aware during the period of the policy which may give rise to a loss or a claim against the insured. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the policy period shall be deemed to have been made within the policy period” — the “notice of circumstances” extension.
Therefore, if something happens during the policy period which the insured thinks might, at some future point, result in a claim against him, he can give notice to his insurer. Should the claim subsequently materialise, the insured will have the benefit of his insurance cover regardless of the passage of time between notice and claim.
So as the policy period nears expiry, the insured can simply present a ‘laundry list’ of all the circumstances which made him feel nervous during the period of cover. He could also include some clever wording to sweep up anything else done during the relevant period which, at that moment, does not appear to be a problem — but you never know what the future might bring.
Unsurprisingly, the ‘notice of circumstances’ extension does not operate in this blanket, ‘catch-all’ way. In order for the insured to have the benefit of this extension, the following points need to be borne in mind.
‘As soon as practicable’: how soon is notice to be given of a circumstance which may give rise to a claim? The London Market accepts a reasonable latitude in the words ‘as soon as practicable’ and usually what constitutes this time frame is decided between insurer and insured against the context of the commercial purpose of the insurance policy. It is rare for notices of circumstances given within the policy period to be rejected on the grounds that it has not been given as soon as practicable. But insureds would be advised not to delay giving notice until the end of the policy of a circumstance which was known in the first month.
‘Circumstance… which may give rise to a loss or claim’: what will constitute a ‘circumstance’? The circumstance has to be one which, when considered objectively, creates a reasonable and predictable possibility that it will give rise to a loss/claim against the insured. There is no need for the loss/claim to be certain, or even probable or likely. Whether the claim is good or bad is also irrelevant. The key is for there to be a possibility or a perceived possibility that, at some future stage, a loss or a claim might arise: “All that need exist is a state of affairs from which the prospects of a claim (whether good or bad) or loss emerging in the future are “real” as opposed to false, fanciful or imaginary”.
‘Become aware during the period of the policy’: at what stage is the insured aware of the circumstances and therefore obliged to give notice? A simple answer is that the insured should give notice when he has become aware for the first time during the policy period, of the relevant circumstances. If, however, notice is given at a time when the insured was not actually aware of the circumstances (i.e. by using some clever ‘catch-all’ wording), then the notice is ineffective. How does this operate in the context of a firm of professionals, where one partner becomes aware of something (‘the involved partner’) but the other partners have no ‘awareness’? The partnership can only be said to be aware once the involved partner has informed the relevant individual within the partnership who deals with insurers on behalf of the firm. Each firm will of course have its own structure for reporting such incidents, but once the designated person with responsibility for such matters is made aware by the involved partner, the awareness can be said to apply across the firm.
‘Give notice’: what will constitute notice? Usually the terms of the policy will make it clear in what format and where the notice should be given. But how do you ensure that insurers understand that the insured is, in fact, giving notice? If notice is to be validly and effectively given, the “reasonable” recipient must be left in no doubt that notice has been given. It should categorically state that it is notifying insurers of a circumstance (or circumstances) which may give rise to a loss or claim. It should provide details of the circumstances being notified and the problems of which the insured is aware.
But what if, at the time of giving notice, there is uncertainty as to what the precise problems or potential problems are? The insured might knowingly, or indeed unknowingly, be facing a hornet’s nest of any number of claims of unknown amount and character. In theory, there is no reason why such a situation cannot be notified as a circumstance if the insured is aware of it.
The key is for the loss/claim to be sufficiently casually related to the fact/event/happening which is the subject matter of the notified circumstance i.e. that the claim can fairly be said to have risen out of the circumstance that has been notified. Insureds need to be alive to the risk that in giving notice of a particular set of circumstances, the claims ultimately faced by them may have developed from circumstances beyond the boundaries of the original notification. It is not simply a case of keeping insurers informed of the progress of notified circumstances. Where new facts come to light which go beyond those originally notified, and if there is still time under the policy, the insured should give ‘fresh’ notice of the new circumstances which have come to light. n
Sascha Foulkes is an associate in the commercial disputes practice group at Taylor Wessing.ProfessionalIndemnityJuly2008
